Did the world become more equal after the financial crisis?
The “elephant chart” has been the most influential graph of the past decade in economics.
It showed that in the 20 years before the financial crisis, global income growth largely benefitted two groups of people: the middle classes of emerging markets, such as China, and the ultra-rich around the world. Meanwhile, the middle and lower classes of Western Europe and North America saw their incomes stagnate.
This work — produced in 2013 by economists Christoph Lakner and Branko Milanovic using World Bank and other data — incensed the left around the world, sparking a debate over income inequality and the failures of capitalism and globalization. The dramatic rise in earnings of the top 1%, seen from 1988 to 2008, has since been blamed for the return of populism and protectionism and resulted in calls for radical policies such as sweeping wealth taxes.
A new paper from one of the authors of what’s become known as the “elephant chart” suggests that things changed in the years immediately following the financial crisis. Milanovic, an economist at The Graduate Center at the City University of New York, has now looked at changes in income distribution from 2008 to 2013. His main finding is that global income inequality actually declined during this period.
While the middle classes of the developing world continued to close the gap with the West, the ultra-rich across the globe saw a significant slowdown in income growth — particularly in the US and Germany. Contrary to hundreds of articles and books, the world became a more equal place in the aftermath of Great Recession.
Milanovic has assembled a gargantuan dataset of household surveys, covering more than 130 countries in the world and around 95% of the world population. The breadth of the data helps explain why his work stops in 2013: Not all countries have statistical offices able to assemble more recent information on the incomes and consumption patterns of individual families.
Analyzing changes in the income distribution, the author finds that global disparities plummeted after 2008. The world’s Gini coefficient, a measure of inequality, fell from 66.4 to 61.6 in just five years, when taking into account differences in purchasing power across countries — a significant drop.
The main driver of this convergence was a steep fall in inequality between richer and poorer countries: In particular, Asia’s economies powered ahead as Europe and the US stagnated, narrowing the gap between the Asian and Western middle classes. The median income in Asia rose by 76% between 2008 and 2013. In Western Europe, North America and Oceania, there was a mere 6% gain. And these figures are taking into account the differing costs of living.
This trend of declining global inequality was already visible in the pre-2008 world. Yet, rather than celebrating the improvements in the lives of millions of Asians, left-leaning politicians and academics in Europe and the US preferred to focus on the right-hand tail of the distribution — the “trunk” of the “elephant” — which showed that the very rich had done much better than the Western middle classes.
According to Milanovic’s latest data, the trunk, and therefore the elephant, may be no more. Taking into account global purchasing power differences, the top 1% of earners saw the lowest increase in income per capita between 2008 and 2013: a mere 6%. Conversely, those around the top 90th percentile in terms of income — which includes much of the European and North American lower and middle classes — saw gains of about 15%. Those around the middle of the global distribution saw income gains of about 60% over the same period.
When the author redrew his curves without adjusting for purchasing power, and correcting for how the rich may under-report their incomes, he saw a slightly higher growth rate of income of the top 1%, but it still remained relatively small. In all analyses, the proportion of global income going to the ultra-rich fell between 2008 and 2013.
The other striking result relates to inequality within individual countries. In theory, it is possible that while global inequality fell, individual countries became more unequal. But this was not generally the case. Milanovic finds that the overall Gini coefficient remained broadly stable between 2008 and 2013 in around 60% of the countries in his sample, while the remaining 40% were split between those that saw a decrease in inequality and those that saw it rise.
Maybe the top 1% in each country still did well compared with everyone else? The data here were mixed too. In India, the years after the Great Recession favored the super-rich, who saw the biggest gains in income. Conversely, in the US, they were the worst-off: While most of the population saw their incomes rise by 5% over this period, the top earners saw a reduction of about 5% — though obviously from a much higher base.
Of course, we don’t have the data to know what has happened since 2013, and we probably won’t for some time. The original “elephant curve” has also been subject to methodological critiques — one being that its results were too dependent on the different rates of population growth around the world. The same problems could apply to Milanovic’s new study.
The current paper also does not look at wealth inequality, which some consider a more important measure of economic disparities though it’s much harder to study. And one can still argue that although inequality overall has declined, it remains far too high and requires radical solutions.
Yet, Milanovic’s new findings deserve the same kind of attention as his old ones. The narrative around the global financial crisis and the rise of the top 1% will require some rewriting.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.